1. This Memorandum contains a summary of
the economic, trade and investment situation in Turkey, followed
by an account of the prospects for EU enlargement in those areas
of particular interest to the DTI. The annexes cover: the activities
in Turkey of British Trade International [Annex A]; and detailed
trade statistics [Annex B].

POLITICALAND
ECONOMIC OVERVIEW

2. Turkey occupies a key geopolitical position:
straddling Europe and Asia, regularly returning Governments which
are Western in outlook. It is a rare example of a secular democracy
in an overwhelmingly Muslim country. Turkey has been a member
of the NATO Alliance since 1952. It signed an Association Agreement
(the "Ankara Agreement") with the EU in 1963, and applied
for full membership in 1987. It has been in a Customs Union with
the EU since 1996, and was confirmed as a candidate for EU membership
at the Helsinki European Council in December 1999.

3. Turkey is a middle income country, with
a population of 64 million and a GDP per capita of around $3,000.
It has undergone a significant transformation over the last 40
years. In 1960, agriculture accounted for over 40 per cent of
GDP. By 1998, services accounted for over half of GDP, manufacturing
another fifth, while agriculture had fallen to around a sixth
of GDP.

4. The Turkish economy has been characterised
by strong growth, averaging around 4.5 per cent per annual since
1970. However, growth has at times fluctuated sharply and has
been accompanied by high inflation (the consumer price index (CPI)
ranged between 64 per cent and 105 per cent over the 1990s) and
large budget deficits (the consolidated public sector deficit
reached 13 per cent of GDP in 1998). There have been substantial
trade deficits in recent years ($14 billion in 1998, about 7 per
cent of GDP), largely offset by strong earnings from services,
especially tourism, and remittances from Turks working overseas.
Turkey's main exports of goods in 1998 were textiles (38 per cent),
followed by agriculture/livestock (11 per cent) and iron/steel
(8 per cent). Turkey imports a wide range of goods with the principal
items in 1998 being machinery and equipment (19 per cent), chemicals
(11 per cent) and vehicles (11 per cent). [See Annex B.]

5. In 1999 the three party coalition government,
led by Prime Minister Bu­lent Ecevit, launched a programme
designed to address fundamental structural weaknesses in the economy.
The programme, which is supported by the IMF (through a 3 year
Standby Agreement) and the World Bank, aims to introduce structural
reforms in the financial, energy, social security and fiscal sectors.
Targets for the end of 2000 include: bringing the CPI down to
25 per cent; a primary government sector budget surplus of £4.5
billion (£9.1 billion including privatisation receipts) equivalent
to 2.2 per cent of GNP; and growth of 5 per cent. Since the launch
of the programme there has been a managed depreciation of the
Turkish lira, increased budget transparency and fiscal discipline,
a start on privatisation and a reduced state guarantee on bank
deposits combined with tighter regulatory controls.

6. The results of the programme have been
broadly positive so far. GNP growth was 4.3 per cent in the first
half of 2000. Inflation has slowed, despite the impact of high
oil prices. Annual consumer price inflation fell from 64 per cent
in September 1999 to 49 per cent in September 2000. The primary
budget surplus between January and August 2000 was £5 billion.
However, an import boom and rising oil prices has led to a substantial
increase in the trade deficit, which doubled to reach $11.7 billion
for the first half of 2000.

7. Turkey was affected by two major earthquakes
in the second half of 1999 which caused considerable economic
damage in the north west part of the country, as well as significant
loss of life. Most of the reconstruction costs (estimated to be
$4-6 billion) are being financed by special loans from international
institutions including the IMF, World Bank and the EU. The UK
is also contributing to the reconstruction effort through a study
into infrastructure in Yalova province and offering to play a
part in the reconstruction phase (British Earthquake Consortium
for Turkey).

PRIVATISATION

8. Turkey's privatisation programme was
launched in 1985 with ambitious targets. But a number of factors
delayed its implementation, including political instability, the
reluctance of politicians to give up control of public enterprises,
opaque privatisation techniques and repeated corruption scandals.
As a result, privatisation receipts were only $4.6 billion between
1985 and the end of 1999, generated mainly from the sale of public
shares in Isbank and the sale of minority holdings on some state-owned
institutions.

9. Under the IMF Standby Agreement, privatisation
is one of the key policy areas aimed at supporting fiscal policies.
The government set a highly ambitious target of $7.6 billion in
privatisation revenues for 2000 alone. It has made substantial
progress towards this target. Privatisation receipts for the first
8 months of the year were $5.4 billion, accounting for 71 per
cent of the target. This stemmed from the sale of government stakes
in enterprises such as Petrol Ofisi (fuel retailing), TUPRAS (Turkish
Oil Refinery Company), as well as the sale of the third mobile
phone licence for $2.9 billion to the Isbank-Telecom Italia consortium.
Part of Turkish Airlines (the tender for which is expected to
be announced in November), the whole of Eregli Iron and Steel
Company and Turk Telekom (the telecommunications company) are
due to be privatised by the end of 2000. In respect of the last,
the Turkish Government has been forced to increase to 34 per cent
its proposed sale of a strategic stake, after international telecommunications
companies showed no interest in an earlier offer of 20 per cent.

TRADE

10. Turkey is one of the UK's top twelve
priority under-exploited markets. The UK was Turkey's third largest
export market destination and fifth largest import source in 1999.
Total bilateral trade reached approximately $4 billion in 1999
and $3.65 billion in the first eight months of this year.

11. The UK's largest exports to Turkey in
1999 were telecommunications, sound recording and reproducing
equipment. This was due to a real increase in Turkish political
and popular awareness of the potential of telecommunications in
economic development, combined with a need to update the existing
network. The exceptional growth in the telecommunications sector
is mainly in fibre optic cable systems, satellite and mobile communications.
Motorola UK has signed a $500 million deal over three years with
Turk Telekom to upgrade and expand their existing systems.

12. Turkey's increasing wealth has also
led to a demand in the medical and pharmaceutical sector from
the UK in the form of setting up private hospitals and medical
equipment. This is now the UK's second largest area of exports
to Turkey. There are also good opportunities for British exporters
and investors in the areas of automotive parts, power generation
and general industrial equipment, office machines and transport
equipment, followed by chemicals and related products.

13. British Trade International (BTI) launched
a three-year Turkey: Positioned for Business Campaign in June
1998 which is designed to give UK exports to Turkey a boost. [See
Annex A.]

14. Turkey's main exports to the UK are
apparel, clothing accessories and textiles. Many major UK clothing
retailers purchase products from Turkish suppliers.

ECGD COVER

15. ECGD has provided a separate memorandum
on its activities including the Ilisu Hydro-Electric Dam.

DEFENCE SALES

16. UK defence sales to Turkey average around
£100 million per annum in niche markets, eg communications
equipment and Land Rover vehicles. But sales topped £400
million in 1999-2000 as a result of successful bids by British
firms to supply the MBD Rapier MK2 missile to the Turkish Air
Force, M Command System and Sonar 2093 to the Turkish Navy, and
satellite receiving equipment for all three services. Moreover,
the British defence industry has prospects to supply in excess
of £1 billion worth of equipment into Turkey over the next
5 years. These include opportunities to supply self-propelled
air defence guns, corvettes, armoured personnel carriers, aircraft
upgrades and sub-systems for Turkey's new attack helicopters.

17. Arms sales to Turkey are subject to
the same scrutiny as all other destinations, in line with the
consolidated EU and national arms export licensing criteria. These
criteria state that an export licence should not be issued if
there is a clearly identifiable risk that the equipment might
be used for internal repression or external aggression. Each licence
application for Turkey is assessed on a case by case basis in
line with these criteria. The situation in south east (predominantly
Kurdish) Turkey is carefully considered (in line with the internal
repression criteria), along with Turkey's record on external aggression
(eg incursions into northern Iraq). The majority of export licence
applications for Turkey are approved each year. Full details are
set out in the Government's Annual Report on Strategic Export
Controls.

FOREIGN DIRECT
INVESTMENT (FDI)

18. The Turkish Government is only now coming
to grips with the need to improve on its record for encouraging
FDI, which has averaged a little over $1 billion per year over
the past decade. Total approved FDI since 1980, when the economy
began to open up, has reached only $27.5 billion. High inflation
and political and economic volatility have been the main reasons
behind investor hesitation. However, the Turkish Government removed
a constitutional obstacle to the provision of international arbitration
on major public sector contracts in January 2000 in order to create
a more attractive investment climate.

19. Total FDI approved was $1.6 billion
in 1998 and $1.7 billion in 1999. This figure looks set to accelerate,
given that a total of $1.9 billion was authorised in the first
nine months of this year. According to cumulative figures to the
end of September 2000, the UK was the fifth largest source of
FDI in Turkey, with a total of $2 billion authorised (7.3 per
cent of the cumulative total of FDI). The other leading foreign
investors are France (19 per cent) especially in the automotive
sector (Renault), Germany (13 per cent), The Netherlands (11.3
per cent) and USA (11 per cent).

20. Major British companies with a presence
in Turkey include BP, Shell, Unilever, Lucas Industries, Rolls
Royce, AstraZeneca, Glaxo Wellcome, HSBC as well as retailers
Marks and Spencer, Laura Ashley and British Home Stores (BHS).

INWARD INVESTMENTTOTHE
UK

21. The UK is the second largest recipient
of Turkish direct investment (the cumulative total of Turkish
investment in the UK to the end of September 2000 was $588 million).
Examples include Toprak, a Turkish-owned sanitary ware producer
that is currently building a $72 million factory, covering 400,000
square feet at Deeside in North Wales. This factory will produce
ceramic wall tiles and bathroom suites for British and West European
markets, with a workforce of 430. Exsa (part of the Sabanci Group
with assets of $10.5 billion) has been established in the UK for
several years. It has captured a 6 per cent share of the EU market
for polyester yarn from its manufacturing base in Leeds.

RELATIONSHIPWITHTHE EU

22. Relations between the EU and Turkey
are conducted on the basis of the 1963 Association Agreement,
one of the earliest bilateral treaties which the EU negotiated
with a non-member country. The Association Agreement set out the
aim of "ever closer bonds" between the peoples of Turkey
and the EEC, to be achieved in part by facilitating the accession
of Turkey "at a later date". In the course of Association,
a Customs Union was to be established and the economic policies
of the Community and Turkey more closely aligned. Under a Customs
Union, not only are import restrictions removed between the contracting
parties (as they are in a free trade area) but the partners also
agree to implement a common trade regime towards third countries.

23. After a transitional period lasting
22 years, the Customs Union duly entered into force on 1 January
1996, and has become the backbone of the country's relationship
with the EU. The Customs Union has eliminated duties and other
import restrictions on trade in manufactured goods. Agricultural
produce is not part of the Customs Union but is covered in a regime
of tariff concessions. The Association Agreement set out the long-term
aim of free trade in agriculture and the progressive achievement
of free movement for workers. The lack of progress towards these
goals has been a source of contention in EU/Turkey relations.

24. The Customs Union has led to a significant
increase in the value of trade between the EU and Turkey from
$27.9 billion in 1995 to $35.8 billion in 1999, enabling the EU
to strengthen its position as Turkey's most important trade partner.
The EU now accounts for more than 50 per cent of Turkish trade.
A separate agreement between the European Coal and Steel Community
(ECSC) and Turkey was reached in 1996 to establish a free trade
area covering coal and steel products by 1999. This free trade
area will be integrated into the Customs Union after 2002 when
the ECSC Treaty expires.

25. The institutional framework set up under
the Association Agreement and Customs Union has not met as frequently
as envisaged in recent years, largely for political reasons. The
Association Council held in April of this year was the first for
three years. Similarly, the Customs Union Joint Committee has
not met as regularly as planned.

26. The Customs Union also requires Turkey
to adopt large parts of the acquis communautaire, particularly
in the areas of the free movement of goods, competition, customs,
commercial policy and the protection of intellectual, industrial
and commercial property. In 1998, the Cardiff European Council
endorsed a European Strategy designed to bring Turkey closer to
the EU in every field. The Strategy covers the free movement of
capital, services, public procurement, industrial and SME policy,
telecommunications and information society, scientific and technical
research, energy and consumer protection. Turkey does not however
have any legal obligations under this programme.

ENLARGEMENT

27. The Helsinki European Council of December
1999 recognised Turkey as a candidate country for EU membership,
but did not invite Turkey to open accession negotiations. As with
other candidates, the EU's policy is that negotiations will not
be opened until the EU is satisfied that Turkey meets the political
criteria for membership set by the Copenhagen European Council
of June 1993. These concern democracy, rule of law, human rights,
and the protection of minorities. As such it is not possible at
this stage to speculate on a timetable for Turkish membership.

28. Full implementation of the Customs Union
should prepare Turkey to meet many of the obligations of membership,
facilitating negotiations once the EU decides to open formal accession
negotiations. Moreover, Turkey's actions under the European Strategy
and the forthcoming Accession Partnership, which is due to be
published on 8 November and is designed to put Turkey's pre-accession
strategy on an equal footing with the 12 other candidate countries,
should also make a major contribution to aligning Turkey better
with the EU in many Single Market areas.

EU ASSISTANCE

29. The European Commission plans for Turkey
to receive

177 million (£102.9 million) per year for the
next three years. This will be made up of

50 million (£29.1 million) per year from two
new funding Regulations specifically for Turkey and

127 million (£73.8 million) per year from "MEDA
II", the EU's external spending envelope for the Mediterranean
and North Africa from 2000. These amounts are within the overall
financial ceilings imposed on EU external spending from 2000-06
by EU Heads of Governments and, provided those ceilings continue
to be respected, the Government has no objection to those amounts
for Turkey. Although the Government's priority for EU external
spending is to shift the balance more in favour of the poorest
countries, the Government recognises the case for Turkey, post-earthquake
and pre-accession to the Community, to qualify for assistance.
In October 2000 the Commission presented a proposal to Member
States for technical assistance to Turkey in the field of quality
standards related to the functioning of the Customs Union. Assistance
of this kind is necessary to enable Turkey to upgrade its administrative
capacities and implement the acquis communautaire effectively.

IMPLEMENTATIONOFTHE ACQUIS

30. The European Commission's last Report
on Progress of Turkey towards Accession was published in October
1999. (It is available through the European Commission's website
http://europa.eu.int/comm/enlargement/pas/turkey.htm.) The Report
concluded that Turkey continues to make most progress in alignment
in the areas covered by the Customs Union and, to a lesser extent,
in areas covered by the European Strategy. The next progress report
is due to be published on 8 November. Particular areas of the
acquis communautaire in which DTI has an interest are examined
below.

FREE MOVEMENTOF GOODS

31. The Customs Union has required Turkey
to align with the acquis communautaire in the areas of
free movement of goods and the adoption of a common commercial
policy. Turkey has singed Free Trade Agreements with the EFTA
countries, the candidate countries from Central and Eastern Europe,
as well as the Former Yugoslav Republic of Macedonia. It is also
a signatory to the 1995 Euro-Mediterranean or "Barcelona"
Process which seeks to establish a free trade area between the
EU and the countries of the Southern and Eastern Mediterranean
by 2010.

32. The Customs Union does however entitle
both Turkey and the EU to deploy anti-dumping measures and certain
other trade defence instruments against each other or against
third countries in cases where harmful trade may be taking place.
As a consequence, there are on-going EU anti-dumping investigations
on steel stranded ropes and cables, colour televisions and paracetamol
from Turkey. The only current measures on Turkish products are
anti-dumping duties of between 3.3 per cent and 15.2 per cent
on certain polyester yarns. There are currently no EU anti-subsidy
measures or anti-subsidy investigations on Turkish products.

MONOPOLIESAND
COMPETITION

33. The UK drinks industry remain concerned
over the continuing privileged position of TEKEL, the state alcohol,
salt and tobacco conglomerate. Draft legislation affecting TEKEL
still does not allow the importation of spirit drinks, for example
whisky, on the basis of free and fair competition. The Government
wishes to see Turkish competition law brought fully into line
with EU standards. It also regards it as important that the Turkish
authorities should ensure that their competition authorities are
adequately resourced in terms of financing, staff numbers and
qualifications and have sufficient statutory independence to do
their job properly.

INTELLECTUAL, INDUSTRIALAND COMMERCIAL
PROPERTY RIGHTS

34. There has been real progress in terms
of protection of intellectual property rights in Turkey. Turkey
has aligned its legislation on a substantial part of the acquis
communautaire in the area of copyright and related rights,
patents, trade marks, designs and models and geographical indications.
It has acceded to a number of multilateral conventions (Paris
Convention, Berne Convention, etc.) and set up new structures
to deal with the implementation of the relevant legislation. Patent
protection on pharmaceutical products and processes has also been
ensured in Turkey since January 1999. But book piracy has been
a major problem in Turkey for over 10 years. Each of the 4 major
UK publishers has between 60 and 100 ongoing infringement cases
in Turkey at any given time.

SERVICESAND
PUBLIC PROCUREMENT

35. The first round of negotiations of an
EU/Turkey Free Trade Agreement on Services and Government Procurement
took place in Ankara on 17-18 October 2000 based on an EU draft
negotiating text. This envisages a transitional period of 10 years
during which Turkey, bearing in mind its status as an EU accession
candidate, shall progressively align its legislation with the
acquis communautaire. Over the same period, restrictions
on trade in services (and public procurement) between the EU and
Turkey are to be substantially eliminated.

36. On public procurement, a draft law is
expected to be presented to the Turkish Parliament very shortly.
The Turkish Government claims this will open public tendering
to international competition and comply with the acquis communautaire.

TELECOMMUNICATIONS

37. Turkey is keenly aware of the economic
importance of the telecommunications sector. As part of a policy
of liberalisation, the Turkish Post Telegram and Telephony (PTT)
was separated into "Turk Telekom" and "Turkish
Postal Administration" in 1995. Under a new telecommunications
law, the Government intend to privatise up to 49 per cent of Turk
Telekom, which will retain its monopoly position until 1 January
2003.

The new telecommunications law also provides
for the establishment of an independent regulatory authority.

SCIENTIFICAND
TECHNICAL RESEARCH

38. There is minimal bilateral contact with
Turkey on Science and Technology issues, the main link being through
the British Council's "partnerships programme" (formerly
known as "academic links"). Since 1982, this programme
has supported an average of 40-60 exchanges annually of researchers
and academics to promote collaborative links between British and
Turkish scientists. In 1999-2000 almost 100 exchanges were supported.
In the current year, the programme has a budget of £66,000
with 22 links. There is no EU Science and Technology Association
Agreement in place with Turkey and the Government is not aware
of any plans for one to be negotiated.

ENERGY

39. Turkey's energy policy initiatives are
broadly in line with the EU objectives of security of energy supplies,
diversification, adoption of market principles, environmental
norms and increased energy efficiency.

40. Important areas for alignment with the
acquis communautaire include the internal energy market,
in particular compliance with the Electricity and Gas Directives,
state interventions in the solid fuels sector, improvements in
energy efficiency (including losses in power transmission and
distribution) and promotion of the use of renewable energies.

41. For budgetary reasons, Turkey postponed
in July plans to build its first nuclear power plant at Akkuyu.
It will however reconsider reinstating the project over the next
ten to twenty years. Turkey's recent ratification of the Energy
Charter Treaty is welcome, not least for its contribution to the
creation of a favourable climate for FDI in the energy sector.

CONSUMER PROTECTIONAND COMPANY
LAW

42. Turkey is setting up the legislative
framework to adopt the acquis communautaire covering consumer
protection. In respect of company law, major differences still
exist in areas such as sole traders, merger provisions, accounting
and auditing legislation. Turkey is however seeking to draft legislation
to fill the gaps with the acquis communautaire. Amendments
to the Turkish Trade Law are expected to be submitted to the Turkish
Government for approval in 2001.

CONCLUSION

43. The prospects for expanding business
between the UK and Turkey are healthy. Customs Union, Turkey's
recognition at Helsinki as a candidate country eligible to join
the EU and Turkey's continuing work in aligning its legislation
with the acquis communautaire should all strengthen Turkey's
economic integration with the EU and continue to give a boost
to trade and investment between the UK and Turkey. So too should
the successful implementation of the IMF Standby Agreement and
further privatisation of state owned enterprises. To improve trading
conditions and attract further foreign investment Turkey needs
to do more, with technical assistance from the EU as necessary,
to enhance conditions for competition; in particular, by amending
legislation in line with EU standards and upgrading administration
in regulatory matters.